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Newsletter – July 2014

Newsletter – July 2014

  1. Court froze HK$1.2 billion Hisense Kelon of shares in Greencool proceedings
  2. Joint HKMA-SFC consultation on mandatory reporting and related record keeping rules for OTC derivatives market
  3. SFC launched corporate regulation newsletter
  4. Ping An of China Securities (Hong Kong) Company Limited reprimanded and fined HK$6 million over internal control failures
  5. SFC revoked license of Yip Wan Fung and banned her for life
  6. SFC banned Fa Kwan Lun for 12 months
  7. SFC suspended Wu Li Jun for six months
  8. Hong Kong Fund management business continued to grow in 2013

1. Court froze HK$1.2 billion Hisense Kelon of shares in Greencool proceedings

On 18 July 2014, the Court of First Instance (CFI) granted an application by the Securities and Futures Commission (SFC) for an interim freezing order over a total of 107,290,000 shares in Hisense Kelon Electrical Holdings Limited (Hisense Kelon), up to a sum of HK$1.2 billion, which the SFC alleges is held for the benefit of Gu Chujun, the former chairman and chief executive officer of Greencool Technology Holdings Limited (Greencool).

Background and allegations

Greencool was listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited on 13 July 2000. On 1 August 2005, trading in Greencool shares was suspended and Greencool was subsequently delisted on 18 May 2007. On 5 March 2010, Greencool was struck off the register of non-Hong Kong companies by the Registrar of Companies of Hong Kong.

In June 2014, the SFC instituted proceedings in both the CFI and the Market Misconduct Tribunal (MMT) against former chairman and chief executive officer, Mr. Gu Chujun, and other senior executives of Greencool, alleging market misconduct involving grossly overstating the company’s financial accounts for the years ended 31 December 2000 to 2004, contravening section 277 of the Securities and Futures Ordinance (SFO).

The SFC further alleged that Gu directed the massive fraud and should be ordered to compensate the minority shareholders who were induced to acquire Greencool shares on the strength of the distorted financial results

Interim order

On 18 July , An interim injunction was granted by the CFI to preserve assets allegedly held for the benefit of Gu pending trial in the section 213 proceedings in which the SFC is seeking remedial orders for more than 1,300 minority shareholders who purchased Greencool shares during the period the SFC alleges Greencool’s disclosed financial position was grossly overstated.

Gu is prohibited from dealing in or disposing of any of those Hisense Kelon shares personally or through a nominee or agent unless he has already maintained within Hong Kong assets exceeding HK$1.2 billion and he only deals in those of his assets in excess of HK$1.2 billion.

The Hon. Mr. Justice A Chan also ordered Gu to disclose to the SFC, by an affidavit, all of his assets whether within or outside Hong Kong at a value of HK$50,000 or more within 14 days of the service of the order on him.

The SFC is seeking an interim order to freeze up to HK$1.59 billion of Hisense Kelon shares allegedly held by or on behalf of Gu. The order freezes those Hisense Kelon shares for up to HK$1.2 billion and the court has asked for more information on the estimation of both the sum that the MMT may order to be disgorged from Gu and the sum that the court may eventually order Gu to pay to the minority shareholders in these proceedings.

A return date of the interim injunction was fixed on 8 August 2014 when the court will review the interim injunction.

Comment

Readers are reminded that Sections 277 and 298 of the SFO prohibit the distribution of materially false or misleading information that is likely to induce another person to subscribe for or buy securities or deal in futures contracts. Both Sections 277 and 298 are market misconduct provisions.

Readers should also take note that under section 213 of SFO, the Court of First Instance may grant an interim injunction to freeze assets of any person who contravened the SFO on the application of the SFC.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR89

2. Joint HKMA-SFC consultation on mandatory reporting and related record keeping rules for OTC derivatives market

On 18 July 2014, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) began a one-month consultation on the detailed requirements relating to the mandatory reporting and related record keeping obligations under the new over-the-counter (OTC) derivatives regime.

Background

In line with global efforts, the HKMA and SFC have been developing a regulatory regime for the OTC derivatives market in Hong Kong. Subsequent to two consultation exercises (in October 2011 and July 2012), the Securities and Futures (Amendment) Ordinance 2014 was enacted in April 2014. The new legislation, which has yet to come into effect, provides a framework for introducing mandatory reporting, clearing, trading and record keeping obligations in respect of OTC derivative transactions in Hong Kong.

The precise ambit of these obligations, and their related details, will be set out in rules to be made by the SFC with the HKMA’s consent and after consultation with the Financial Secretary. The consultation paper issued on 18 July is the first in a series of consultations on such obligations and details. It sets out the HKMA’s and SFC’s detailed proposals for the mandatory reporting and related record keeping obligations.

Following consultation, the proposed detailed requirements will be set out in subsidiary legislation to be made under the new regime.  The requirements aim to enhance financial market stability by increasing transparency in the OTC derivatives market. The proposals have been developed in line with similar reform efforts in other major financial markets, and with input from the industry.

The proposal

The proposal will cover six key main areas, these include:

  • which types of transactions will have to be reported
  • who will be subject to reporting and in what circumstances
  • what exemptions and reliefs may apply
  • reporting timeframes and applicable grace periods
  • the form, manner and contents of reports
  • related record keeping obligations

Consultation period

The consultation period will end on 18 August 2014. The joint consultation paper can be downloaded from the HKMA website or the SFC website. Interested parties are invited to submit their comments to the HKMA or the SFC on or before the deadline.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR88

Consultation paper on the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping) Rules:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=14CP6

3. SFC launched corporate regulation newsletter

On 9 July 2014, the Securities and Futures Commission (SFC) published the first issue of its Corporate Regulation Newsletter as part of an initiative to improve the quality of disclosures by listed companies and listing applicants.

Corporate Regulation team

The SFC’s renewed emphasis on corporate behavior is coordinated by the new Corporate Regulation team, which leads the SFC’s oversight of listed companies from their IPOs onwards. Focusing on disclosure and corporate misconduct, the team works to identify behavior that is prejudicial to the interests of shareholders and the interest of the investing public.

Increase in the number of listed companies’ announcements

The SFC welcomes the increase in the number of listed companies’ announcements to the market since the introduction of the new statutory disclosure regime and it is now looking to shift the focus to making those announcements more meaningful, the newsletter relates. For example, profit alerts and warnings should be price-sensitive by definition, but in 2013 only 14% of such profit alerts and warnings resulted in share price movements. If companies provided clearer, more structured disclosures, announcements would be more meaningful for the market.

Meaningful disclosures

The newsletter also reminds listing sponsors to look critically at what constitutes meaningful disclosures and not take a mechanical box-ticking approach. In particular, sponsors should ensure listing documents provide sufficient risk disclosure for investors to assess a company’s prospects. Sponsors are also reminded to look critically at the opinions of experts engaged on technical matters. Including unreasonable or inaccurate opinions in listing applications could result in the suspension of the vetting process or other sanction.

The newsletter is available on the SFC website. Members of the public may subscribe by filling out the form available under the “Subscribe” link.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR85

Corporate regulation newsletter (July):

http://www.sfc.hk/web/files/ER/Reports/CRN/CR_20140704.pdf

4. Ping An of China Securities (Hong Kong) Company Limited reprimanded and fined HK$6 million over internal control failures

On 9 July 2014, the Securities and Futures Commission (SFC) has reprimanded Ping An of China Securities (Hong Kong) Company Limited (Ping An) and fined it HK$6 million over serious internal control deficiencies and other matters.

Background

Ping An is licensed under the Securities and Futures Ordinance (SFO) to carry on business in Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.

Lack of internal controls on AML

An SFC investigation found that, between 1 August 2010 and 30 April 2011 (Relevant Period), Ping An failed to establish anti-money laundering internal control procedures. Ping An also failed to actively identify and report to the SFC and the Joint Financial Intelligence Unit suspicious transactions in a timely manner. Furthermore, there was a lack of properly formulated internal AML policies at Ping An and, as Ping An did not provide AML training to members of staff, its staff were unaware of any internal requirements on AML during the Relevant Period.

These failures were in breach of paragraphs 4.2, 9, 10 and 11 of the AML Guidance as well as paragraph 5.4, General Principle (GP) 2, GP3 and GP7 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct).

Handling client assets

The SFC also found during the investigation that there was a lack of internal policies on the handling of third party payments at Ping An. For all the 37 third party payments effected during the investigation period, Ping An did not conduct any assessment on the reasons for making the third party payments.

In addition, Ping An did not obtain identity proof of payment recipients for 23 of these third party payments.

Moreover, in some cases, third party payments were effected by Ping An without having received proper written directions from the relevant client.

There was also an occasion where Ping An effected a third party payment to its employee. It concerned a payment made from a client’s account into the account of the client’s daughter, who was then a customer service officer at Ping An.

The manner in which Ping An handled client assets and its lack of policy and control in relation to third party payments during the Relevant Period was in breach of sections 5(1)(b) and 5(3) of the Securities and Futures (Client Money) Rules, paragraphs 2 and 3 of the Suggested Control Techniques and Procedures for Enhancing a Firm’s Ability to Comply with the Securities and Futures (Client Securities) Rules, paragraph 9 under Part VII of the Management, Supervision and Internal Control Guidelines for Persons Licensed By or Registered with the SFC (Internal Control Guidelines), as well as GP2, GP3, GP8, paragraphs 4.3 and 11.1 of the Code of Conduct.

Staff dealing policies

Ping An failed to ensure compliance with its staff dealing policies, which were designed to help minimize conflicts of interests.

Ping An employees are required to declare their personal account(s) upon joining the firm by way of filling in an employee declaration form. However, two of the 15 employees who joined Ping An during and prior to the Relevant Period did not submit the relevant employee declaration forms until after 12 and 19 months upon joining respectively.

Ping An did not have a set of staff dealing policy that was clearly formulated, communicated to its employees and enforced by compliance or senior management, nor did it provide adequate training to ensure staff awareness on conflicts of interests and compliance during the Relevant Period. This is in breach of paragraphs 2 and 3 under Part III of the Internal Control Guidelines, and paragraph 12.2, GP2, GP6 and GP7 of the Code of Conduct.

Account opening procedures

During the Relevant Period, 15 client accounts were opened without valid address proof. Although Ping An had in place a set of account opening procedures, it had failed to diligently enforce such procedures. Ping An was in breach of paragraph 1 under Part VII of the Internal Control Guidelines, and paragraph 5.4, GP2 and GP7 of the Code of Conduct.

Lack of compliance function

The above internal control deficiencies reflect the inadequacy of Ping An’s compliance function during the Relevant Period.  In particular, between mid-October 2010 and March 2011, Ping An had no independent designated compliance officer. The then responsible officer of Ping An at the material time took up the responsibility of overseeing the compliance function at Ping An. However, she did little to discharge her responsibilities.

The SFC considers that Ping An did not have an effective compliance function during the Relevant Period, in breach of Part V of the Internal Control Guidelines and paragraph 12.1, GP2, GP3 and GP7 of the Code of Conduct.

Disciplinary actions

The SFC is of the view that there is a need to send a clear message to the market on the importance of effective internal controls and procedures. The SFC publicly reprimanded Ping An, pursuant to section 194(1)(b)(iii) of the Securities and Futures Ordinance (SFO) and imposed on Ping An a financial penalty of a total of HK$6 million, pursuant to section 194(2)(b) of the SFO.

Comment

This enforcement action is highly relevant to licensed corporation particularly fund managers to remind them that they should check their AML compliance program is in compliance with the relevant SFC and regulatory requirements.

Licensed corporations should have in place proper systems and controls for the identification and reporting of suspicious transactions. The first and foremost step is to gain sufficient knowledge about a customer’s business and financial circumstances (through customer due diligence and ongoing monitoring) to recognize that a transaction, or a series of transactions, is unusual. There should also be procedures in place for reporting internally by escalation to senior management and reporting externally to the Joint Financial Intelligence Unit of any suspicious transactions.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR87

5. SFC revoked license of Yip Wan Fung and banned her for life

On 3 July 2014, the Securities and Futures Commission (SFC) has revoked the license of Ms. Yip Wan Fung and prohibited her from re-entering the industry for life.

Background

Yip is a licensed representative under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) regulated activity and accredited to Global Credit Securities Limited. She is a responsible officer of Global Credit Securities Limited.

Between late July of 2005 March 2006, Yip conspired to defraud OG Development Company Limited (OGD) and Hing Yip Holdings Limited (Hing Yip ) by dishonestly causing and permitting OGD to enter into a contract with Greatson Corporation Limited (Greatson) whereby OGD agreed to buy machinery at a purchase price of approximately HK$ 153 million.

In October 2010, Yip was sentenced to imprisonment of six years by the District Court following conviction of four criminal offences, including conspiracy to defraud, publishing a false statement and conspiracy to deal with the proceeds of an indictable offence. Yip was also disqualified from becoming directors of companies for eight years without leave of the court. Yip subsequently filed for an appeal. In March 2014, the Court of Final Appeal dismissed Yip’s application.

Disciplinary action

The SFC considers Yip is not a fit and proper person as a result of her convictions. Yip was subsequently prohibited from re-entering the industry for life.

Comment

Readers are once again reminded that it is the duty of a licensed person to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). Paragraph 7.1 of the Fit and Proper Guidelines provides that a person may not be fit and proper if that person was found to be of poor reputation, character or reliability, lacking in financial integrity, or dishonest, which may be evidenced by that person’s being found by a court for fraud, dishonesty or misfeasance, or by his being convicted of a criminal offence which is of direct relevance to fitness and properness.

Readers should also note that SFC’s disciplinary actions against Yip are empowered by sections 194 to 196 of the Securities and Futures Ordinance, which provide that the SFC may revoke the license of a regulated person if he is found to be guilty of misconduct or is not fit and proper to be or to remain the same type of regulated person.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR83

6. SFC banned Fa Kwan Lun for 12 months

On 7 July 2014, the Securities and Futures Commission (SFC) has banned Mr. Fa Kwan Lun from re-entering the industry for 12 months from 4 July 2014 to 3 July 2015.

Background

Fa was licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 3 (leveraged foreign exchange trading) regulated activities and was accredited to BOCI Securities Limited between May 2006 and December 2012.

The disciplinary action follows an SFC investigation which found that between March 2007 and December 2012, Fa, who was an account executive at the material time, concealed from his employer his beneficial interest in, and his personal trading activities conducted through, the securities account of his mother-in-law. In particular, such interest and personal activities in the account were not disclosed in his declarations of investments and investment accounts made to his employer.

The SFC also found that Fa had handled client money by transferring funds for four clients to their trading accounts through his personal bank account between June 2011 and July 2012. By letting his clients’ money mingle with his money in his bank account, he failed to ensure that his clients’ assets are properly safeguarded.

Disciplinary action

Fa’s concealment of his beneficial interest in and personal dealings through his mother-in-law’s account was dishonest and amounts to a breach of General Principle 1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). His misconduct had made it impossible for BOCI to actively identify and monitor his trading activities and detect any potential conflict of interest situations and/or other malpractices arising from such activities.

Fa also failed to act with due skill, care and diligence in managing his clients’ accounts and in the best interests of his clients in contrary to General Principles 2 of the Code of Conduct. By letting his clients’ money mingle with his money in his bank account, Fa has also breached General Principles 8 of the Code of Conduct for his failure to diligently ensure that his clients’ assets are properly safeguarded.

The SFC considers Fa’s misconduct called into question his fitness and properness to be a licensed person. Fa was subsequently banned by the SFC from re-entering the industry for 12 months from 4 July 2014 to 3 July 2015.

Comment

Readers are reminded that it is the duty of a licensed person to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”).   General Principle of the Code of Conduct requires licensed persons to act honestly, fairly, and in the best interests of their clients and the integrity of the market, in conducting their business activities.

Readers should take note that safe custody of client assets is a fundamental obligation of licensed corporations. It is also the duty of a licensed person to abide by the Code of Conduct. A licensed person should exercise due skill, care and diligence and to act in the best interests of its clients.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR86

7. SFC suspended Wu Li Jun for six months

On 3 July 2014, the Securities and Futures Commission (SFC) suspended Ms. Wu Li Jun, a former employee of China Merchants Securities (HK) Co., Limited (China Merchants Securities), for six months from 3 July 2014 to 2 January 2015.

Background

Wu was licensed as a representative under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and was accredited to China Merchants Securities (HK) Co., Limited and China Merchants Futures (HK) Co., Limited between 25 January 2006 and 14 January 2014.

The disciplinary action follows an SFC investigation which found that between September and December 2011, Wu made nine deposits in the total sum of HK$15,831,032 for various clients to China Merchants Securities’ segregated accounts for holding client monies. Wu knew that China Merchants Securities did not permit her to make cash deposits on behalf of her clients in their absence. She nevertheless disregarded the requirement and deliberately circumvented its internal control procedures governing the ways in which client deposits should be made to China Merchants Securities by disguising the deposits as if they were made by the clients themselves.

Wu also failed to properly and adequately safeguard client assets as she had put her clients’ interests at risk by allowing her clients to deposit their monies into her personal bank account or a third party’s bank account before the monies were deposited into China Merchants Securities’ segregated accounts.

Disciplinary actions

The controls against depositing money directly into bank accounts of account executives are measures to prevent fraud and misappropriation of client assets. As a licensed representative, Wu was required under General Principle 8 of the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) to ensure that assets received from clients, including their monies, are properly accounted for and adequately safeguarded. By allowing her clients to deposit monies into her personal or a third party’s bank account before she deposited the monies into CMS’ Accounts, she has put her clients’ interests at risk, in breach of General Principle 8 of the Code of Conduct.

The SFC considers that Wu’s conduct called into question her fitness and properness to be a licensed person.  She was subsequently suspended for six months from 3 July 2014 to 2 January 2015.

Comment

Readers should take note that safe custody of client assets is a fundamental obligation of licensed corporations. It is also the duty of a licensed person to abide by the Code of Conduct. A licensed person should exercise due skill, care and diligence and to act in the best interests of its clients.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR82

 

8. Hong Kong Fund management business continued to grow in 2013

On 8 July 2014, the Securities and Futures Commission (SFC) released the annual Fund Management Activities Survey (FMAS) which shows that the combined fund management business in Hong Kong hit another record high of HK$16,007 billion as of the end of 2013, representing year-on-year growth of 27.2%.

The FMAS

The FMAS has been conducted annually since 1999 to help the SFC assess the industry’s state of affairs for policy setting and operations planning. This year, a total of 555 institutions responded to the survey on a voluntary basis. They included 488 licensed asset management and fund advisory corporations, 47 registered financial institutions and 20 insurance companies

A preferred platform for international investors

The latest survey indicates that Hong Kong continued to be a preferred platform for international investors to invest in Asia. Contributions from overseas investors reached a historic high of HK$11,382 billion, 72% of the total fund management business in 2013.

“The record high assets under management (AUM) of our combined fund management business at the end of 2013 ranks us among the top asset management hubs in Asia ex Japan.  Significant inflows of overseas capital underscore the value and attractiveness of our open markets and our role as an international asset management center,” said Mrs. Alexa Lam, the SFC’s Deputy Chief Executive Officer and Executive Director of Investment Products, International and China.

Performance of different market players

Licensed asset management and fund advisory corporations continued to contribute the largest proportion of the combined asset management business.  Their aggregate asset management and fund advisory businesses amounted to HK$11,788 billion at the end of 2013, up 28.4% from end-2012.

Registered institutions recorded a 27.8% increase in their aggregate asset management and other private banking businesses to HK$3,678 billion at end-2013.

Insurance companies reported a 1.7% increase in their assets under management to HK$364 billion at end-2013.

Highlights of the survey

Non-REIT (real estate investment trust) asset management business has increased by 38.5% to HK$11,417 billion in 2013.  Of this amount, HK$5,827 billion worth of assets (or 51.0%) was managed in Hong Kong and 74.6% of these assets managed in Hong Kong were invested in Asia. Other private banking business increased by 2.7% to HK$2,752 billion in 2013. Fund advisory business grew by 11.6% to HK$1,661 billion in 2013.

The market capitalization of SFC-authorized REITs has increased by approximately 1.7% to HK$177 billion in 2013.

Center for creation and development of renminbi assets and products

The FMAS report notes that Hong Kong is committed to maintain its lead as the center for creation and development of Renminbi assets, products and services.  At the same time, as the number of Mainland-related financial institutions establishing operations in Hong Kong continues to increase, they have brought new opportunities to the Hong Kong market.

SFC’s role in facilitating market development

Furthermore, the report notes that the SFC continues its efforts to facilitate market development and safeguard investor interests through launching various facilitative measures and regulatory initiatives. The SFC is also committed to investor education and the ongoing monitoring of investment products.

“The SFC will continue to follow through with the Mainland regulatory authorities on arrangements in relation to the mutual recognition of funds between Hong Kong and the Mainland. This initiative will help promote Hong Kong domiciled funds. Increased AUM will further develop the ancillary professional service sectors engaged in the product development, investment management and distribution of sales of funds. We need to take positive steps to ensure that we have a robust and attractive platform with sufficient expertise to capture the ever-growing opportunities in the region, with China as one of the key driving forces of economic growth,” Mrs. Lam said.

For details, please refer to the Fund Management Activities Survey:

http://www.sfc.hk/web/EN/files/ER/Reports/2013%20FMAS%20Report.pdf

The article is for general information purpose only and is not intended to constitute legal or other professional advice.

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Regulatory News (Jul 2014)